Money spinner: Five ways to finance rapid growth

It’s the scenario that every business dreams of when starting out – experiencing rapid success and reaching growth goals far quicker than anticipated.

Unfortunately, rapid growth can also be the stuff of nightmares for many businesses, creating a situation where resources, both human and financial, are stretched to their limits.

When a business grows quickly, it can create a wide range of competing demands for financial resources, from investing in more stock and supplies to needing money to hire staff, open new premises or to buy new equipment. This is termed as overtrading – where a business’ sales are growing faster than it can finance them.

All of these financial demands create pressure on cash flow, threatening to place the business in crisis.

It’s no secret that along with poor management, cash flow issues are the biggest contributor to business failure in Australia, particularly for small business and start-ups.

So the question is, how do you go about achieving rapid growth while ensuring you’re business remains financially healthy at the same time. The simple answer – it’s all in the financing.

Here’s five options to consider when looking to finance rapid growth:

1. Seek a Bank Loan

One of the most common ways of financing rapid growth is to borrow money from a bank – also known as debt financing. The benefit of this type of finance is you not only remain in control of how the money is spent, but it also won’t have a lasting impact on your business structure. It’s also generally a very quick way to access finance, which is particularly useful when you’re growing quickly.

The drawback of a bank loan is that you’re essentially paying for the money that you borrow, and you’re tied to repayments and the conditions of the lender. Specifically, the lender will normally require you to secure the loan using your residential property, which increases your risks. If you slip up, there’s potential for the lender to seize your property or other assets.

2. Loans from family or friends

For smaller amounts of money, one option may be to seek finance from friends or family. While this option is likely to offer a quick fix, it also has the potential to damage relationships if things go wrong. Think carefully before taking this option, and if you do, remember to put everything into a formal agreement.

3. Invoice financing (factoring)

Another option when looking for quick capital is to turn to invoice financing, previously known as factoring, which involves a business selling its invoices to a bank, normally at a discount. Invoice financing enables a business to improve cash flow by accessing money owed for invoices immediately, rather than waiting for 30, 60 or 90 days for payment. This provides a solution to immediate cash requirements, as well as meaning your property (or other assets) aren’t at risk.

There are some drawbacks to invoice financing, including the cost and the internal administration.

Many mainstream lenders provide access to invoice financing.

4. Selling a share of your business

Selling a share of the business involves giving up part of the ownership of the business, but unlike venture capital arrangements (see below), investors are less involved in decision making for the business. In return for investing in a business, shareholders receive dividend payments should the business be profitable.

Shares can be offered privately, or by listing the company publicly on the stock exchange and inviting financial participation.

5. Venture capital or angel investors

Also known as equity finance, this type of financing involves investment in your business, in the form of capital, in return for part ownership of the operation. Along with capital, there is also the potential for the exchange of skills or time, in order to ensure the business reaches its potential and is successful.

The benefit of financing in this way is that you’re not paying interest on the money you raise, and if the business fails, you generally won’t have to pay it back. With the right investors, you can also bring great experience, skills and knowledge to your business.

On the flipside, equity finance involves being prepared to give up part of the ownership of your business, which also means involving them in future decision-making processes. This type of funding is also likely to be harder to source, meaning it may not offer the quick fix solution you’re seeking in fast growth situations.

Choosing the right option

Unfortunately, choosing the right financing option depends on a range of factors including how soon you need the money, how much you need, the lifecycle stage of your business and whether you’re looking for more involvement and assistance than money.

One of the Bentleys’ experienced business advisors will be able to guide you through the options that are best suited to your business’ needs.

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